Session 3 Types of cost and cost behavior
  Main contents:
  1. Classifying costs
  2. Cost objects, cost and cost centers
  3. Analysis of costs into fixed and variable elements
  3.1 Classifying costs
  Costs can be classified in a number of different ways:
  · Element – costs are classified as materials, labor or expenses (overheads)
  · Nature – costs are classified as being direct or indirect.
  a. Direct cost is expenditure that can be directly identified with a specific cost unit or cost center.
 ?。?)。 Direct material is all material becoming part of the product unless used in negligible amount and/or having negligible cost. (component parts, part finished work and primary packing material)
 ?。?)。 Direct wages – are wages paid for labor either as basic hours or as overtime expensed on the product line.
 ?。?)。 Direct expense are any expense which are incurred on a specified product other than direct material and direct labor.
  b. Indirect costs/ overheads; are expenditure that can not be directly identified with a specific unit or cost center and must be ‘shared out’ on an equitable basis.
  · Behavior –costs are classified as being fixed, variable, semi-variable or stepped fixed.
  a. Fixed costs: are costs that are not affected in total by the level of activity, but remain the same.
  b. Variable costs: are the costs that change in total in direct proportion to the level of activity.
  c. Semi-variable/semi-fixed/mixed costs: are costs which contain both fixed and variable components and so it partly affected by changes in the level of activity.
  d. Step costs: are fixed in nature but only within certain level of activity.
  · Function: costs are classified as being production or non-production costs.
  e. Production costs: are costs included in a stock valuation. The product cost is the cost of making or buying.
  f. Period costs (general cost): are costs that are not attributed to product costs, but instead are treated as a cost of the time period when they arise.
  · Other cost classification:
  Avoidable cost: cost which can be eliminated by changing operations
  Unavoidable cost: cost which will not be changed by decision making.
  Controllable cost: those cost controllable by a particular manager in a given period.
  Uncontrollable cost: any cost that can not be affected by management within a given period.
  COST MODEL: $
  Direct material: 2
  Direct labor 3
  Direct expense 1 Direct cost 6
  Production overhead (Note) 1
  Total production cost 7
  Administration Overhead 1
  Selling and distribution Overhead 1 Total cost 9
  Note: Production overhead includes indirect material, indirect labor and indirect expense.
  3.2 Analyzing costs:
  Cost objects: a cost object is any activity for which a separate measurement of cost is undertaken.
  Cost units: a cost unit is a unit of product or service in relation to which costs are ascertained
  Responsibility centers: a department whose performance is the direct responsibility of a specific manager.
  The main responsibility centers are:
  · Cost center – the performance of a cost center manager is judged on the extent to which cost targets have been achieved.
  · Revenue center – Within an organization, this is a centre or activity that earns sales revenue. And whose manager is responsible for the revenue earned but not for the costs incurred.
  · Profit center – a part of the business whose manager is responsible and accountable for both costs and revenue. The performance of a profit center manager is measured in terms of the profit made by the centre.
  · Investment centre – a profit centre with additional responsibility for investment and possibly also for financing, and whose performance is measured by its return on capital employed.
  (ROCE)。
  Cost equations:
  Equation of a straight line
  The equation of a straight line is a linear function and is represented by the following equation:
  Y = a + bx
  Total cost = Total FC + Total VC
  Y= a + bx
  · Y = total cost
  · a = the fixed cost for the given period
  · b = the variable cost per unit
  · x = the number of units of activity
  Cost graphs
  Cost and revenue $
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